Tech

Analysts: A Sprint deal with T-Mobile sensible but difficult

Deal will have to overcome technology, political hurdles

By

AudeLagorce

LONDON (MarketWatch) -- A deal with Sprint Nextel may allow Deutsche Telekom to boost margins at its T-Mobile U.S. unit and leapfrog rivals Verizon Wireless and AT&T in the race to provide fourth-generation services, but different network technologies will be a major sticking point, analysts said Monday.

Over the weekend, the U.K. newspaper The Sunday Telegraph reported that Europe's largest telecoms operator, Deutsche Telekom (DTE)
DT
was mulling a multibillion bid for Sprint Nextel Corp.
S, -2.97%
the U.S.'s third-largest mobile operator, with a market valuation of around $10.6 billion.

Report of the tie-up being studied comes less than a week after the German group agreed to place its struggling U.K. mobile operations in a joint venture with France Telecom's (FTE)
FTE, -2.32%
Orange U.K. to create Britain's largest wireless operator. See full story.

With the fate of T-Mobile U.K. sorted, it makes sense for DT Chief Executive Rene Obermann to turn his attention to T-Mobile U.S., a business he has partly blamed for dragging on the group's results in the first quarter. At the time he said the unit's woes were "part structural," sparking speculation he may explore deals.

According to the Telegraph report, DT has been studying a tie-up with Sprint for more than a year but serious legwork began in earnest three months ago. The report didn't mention the level of the bid being considered.

Sprint shares leapt over 10% in early trade. Deutsche Telekom's U.S.-listed shares fell by around 1%.

Spokespersons for both DT and Sprint declined to comment.

Not just speculation

Analysts on Monday said the report should be taken seriously.

"The revival of this long-standing rumor should not be dismissed as merely a case of the rumor mill being turned once again," Daiwa Securities analyst Michael Kovacocy said in a note to clients.

He argued that a deal would be timely for DT because it faces an "impending significant deterioration" in its U.S. operations as a result of the dollar's weakness and an increasingly competitive market where T-Mobile's operations lack scale.

The unit is struggling to compete with larger rivals Verizon Wireless, a joint venture of Verizon Communications, Inc.
VZ, +0.70%
and Vodafone Group (VOD)
VOD, +0.68%
and AT&T
T, -0.07%
which have better 3G networks, and with smaller operators offering cheaper deals.

A move to buy out Sprint may ease price competition by removing a major threat to T-Mobile U.S.'s customer base -- Boost Mobile, Kovacocy said. The operator, which offers aggressively priced pre-paid services, is owned by Sprint.

Later on DT might even decide to consolidate the pre-paid segment by seeking to acquire Leap Wireless International
LEAP
or MetroPCS
PCS
Kovacocy added.

Another benefit of a DT-Sprint deal would be to give T-Mobile U.S. a presence in 4G data connectivity via Sprint's WiMax service.

Network integration issues

But the merger would be extremely complex on the network side, industry analysts warned.

Sprint runs on CDMA and iDEN networks -- inherited from Nextel -- while T-Mobile U.S. runs on GSM and WCDMA. Sprint also has a stake in Clearwire
CLWR
a WiMax expert. In other words DT and Sprint use completely different technologies.

"It would be quite a messy merger to pull through given the number of technologies to sort out. There are five technologies there trying to do one or at the most two things," said Phil Kendall, analyst at research house Strategy Analytics.

"Deutsche Telekom would have to spend a lot of money on figuring out a short- and medium-term path to transfer these different networks to a common 4G technology," he said.

In fact he stressed that Sprint itself has struggled to integrate its network following the acquisition of Nextel in 2006.

The upside of a deal, however, considering the technology hiccups at Sprint on the networks side, is that the asset would probably be relatively cheap and would allow T Mobile U.S. to snatch 49 million new subscribers.

Another hurdle to a deal, however may be political, UniCredit analysts warned Monday, as DT, which is partly government owned and controlled, would become one of the major mobile operators in the U.S. with a 30% market share. The German government has a 32% stake in DT.

On the financial side, a deal would have to be fully debt financed, UniCredit stressed, considering DT has in the past ruled out using its shares for the purpose of acquisitions. As a result, a deal may cause more than a one-notch downgrade.

For these reasons the broker said it believes a debt-financed acquisition is unlikely and that DT could come up with a different scenario, such as a joint venture, instead.

"Managing the Sprint networks and being the main supplier for T-Mobile network, we think Ericsson is in a very strong position to expand managed services to T-Mobile and benefit from the likely transition of Sprint networks to WCDMA-LTE technologies in the longer term," they said.

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